Are Legal Fees Tax Deductible?
Not all attorney's fees are tax deductible, so be familiar with a couple of general rules to guide you come tax time.
General Rules: Think Income and Taxes
Attorney's fees are deductible if you paid them to:
- Help earn or collect taxable income
- Help determine, collect or get a refund of any tax
So if your attorney helps you make money you have to pay taxes on, those attorney's fees should be deductible. Fees for preparing your taxes or tax advice should be deductible, too.
Common Types of Deductible Attorney's Fees
Fees for these services are usually deductible:
- Tax advice you get in a divorce
- Recovering alimony from your ex
- Defending an employment-related lawsuit against you
- Your share of legal bills for a class-action lawsuit against your employer
- Tax advice when drawing up an estate plan
To deduct these fees you must itemize deductions. They're miscellaneous deductions. The deduction is limited to the amount above 2 percent of your adjusted gross income.
Non-Deductible Attorney's Fees
Generally, if an attorney's fee isn't related to producing income or paying taxes, there's no tax deduction. Here are some examples:
- Contingent fees for personal injury lawsuits. The award you win is generally not taxable
- Fees for settling a will or probate case or related lawsuits
- Fees for buying or selling a home
- Fees for defending you in most civil or criminal cases
Ordinary and Necessary Business Expense
You can deduct attorney's fees related to running your business as an ordinary and necessary business expense. These include fees for services related to starting up, like incorporating your business.